Osborne to freeze air passenger duty as oil prices continue to soar

In cancelling the air duty, George Osborne is reaching out to the 'squeezed middle'. Photograph: Ho/Reuters

George Osborne will announce the freezing of air passenger duty in Wednesday's budget as part of the government's attempt to soften the impact of soaring oil prices on the so-called "squeezed middle".

But Osborne ruled out wider tax cuts apart from continuing to lift personal allowances in line with the policy pushed by the Liberal Democrats to please "alarm clock Britain", Nick Clegg's description of the squeezed middle. The chancellor is expected to emphasise tax reform and enterprise in a budget billed as marking a shift from recovery to reform.

In perhaps his most daring move, he is likely to call for the integration of income tax and national insurance, a complex move with many potential pitfalls.

From the Conservative viewpoint, it would have the advantage of highlighting how much each individual pays in tax, part of which is currently hidden behind national insurance contributions.

The decision not to go ahead with the planned increase in air passenger duty (APD) is designed to help holidaymakers, who are seen as embodying the "squeezed middle". The rise would have come into force in November. The recent unrest in North Africa and the Middle East sent the cost of crude oil well above $100 a barrel.

The move – which will cost the Treasury £150m in lost tax revenue – will be part of a twin-track approach along with the decision to scrap the above-inflation increase in fuel duties for motorists, which would have added 5p a litre to the price of unleaded petrol.

Treasury sources said the chancellor recognised that millions of households were struggling as a result of higher fuel prices and wanted to cut the cost of family holidays. "He wants to help people through a tough year," one said.

One source said the budget is going to be about helping people in lots of small ways.

The Treasury said an increase in APD in line with inflation this year would have seen an economy fare to European destinations go up by £12 or more in economy, and from £24-£26 for all other classes. For flights to the US, economy fare prices would have risen by £12-£24 and for those to South Africa by £16-£32.

The increases had been initially introduced as a green tax, an area likely to suffer on Wednesday.

Osborne is likely to report that the budget deficit for 2010-11 will come in below the £148bn previously estimated, although the Treasury was warning on Sunday the improvement was likely to be less than the £10bn being forecast by some City analysts.

The respected Ernst & Young Item club predicted an £8bn windfall. They claimed borrowing will come in at £140.2bn in 2010-11, compared with the Office for Budget Responsibility's (OBR) forecast of £148.5bn.

Hopes of a smaller deficit were boosted by strong tax receipts in January, but the government suspects that the figures were flattered by the timing of self-assessment payments of income tax.

Sources warned that the February data, due out on Tuesday, might be weaker. The OBR will also report a downgrade in growth for this year and next, but Osborne ruled out any change in strategy, saying: "That would be a huge mistake. We would lose economic stability. We would be back in the mess of wondering what is going to happen to the UK's credit rating. That is not going to happen."

He added: "Having undertaken the rescue mission, I do not have to come back and ask for more this year.

"I can say in the budget this week I am not going to be asking for more tax rises or spending cuts."

Osborne said there would be extra money for apprenticeships and vocational skills programmes and he was also looking at steps to reduce the impact of high petrol prices.

A senior Liberal Democrat said the party had been intimately involved in drawing up the budget. There had been three major areas of disagreement, but these had been settled amicably by last Thursday by the so-called "quad" of Osborne, David Cameron, the Treasury chief secretary Danny Alexander and the deputy prime minister, Nick Clegg. The source said: "The real throw of the dice was made in the spending review last year. I do not think people realise the extent to which there will not be major announcements in budgets from now on".

But the Liberal Democrats are pleased that the budget will see further progress on lifting personal allowances, its favoured scheme for helping the poorest taxpayers. The income tax threshold was raised from £6,475 to £7,475 last year; it may go up to £8,000 on Wednesday. The coalition target figure is to raise the threshold to £10,000 by the end of the parliament.

Alexander said on Sunday: "From next month, almost a million of the lowest-paid won't pay any tax at all. This change won't just help those earning less than £10,000. In fact, once you take all the coalition's personal tax changes into account, everyone earning under £35,000 will be better off."